Credit CARD Act of 2009 – Good or Bad?

Yesterday I wrote about the Credit Card Accountability, Responsibility and Disclosure (CARD) Act of 2009, which places restrictions on the credit card industry. My article gave a basic outline of the Act, and in general gave some reasons why I support it. I think the credit card industry is intentionally convoluted and has built its business model on late fees, other fees, and interest rate hikes intended to keep credit card customers perpetually making payments.

I understand that customers are ultimately responsible for their debts and no one forced them to use the credit card or not make their payments, and I have no problem with the credit card companies being in the business to make money. However, some of their practices strike me as unethical.

Overall, I think the Credit CARD Act of 2009 is beneficial. But I am always wiling to listen to both sides of the argument, so I am publishing a comment left on yesterday’s article, and my response to the comment. I’d love to hear your comments either for or against the act.

Why the Credit CARD Act of 2009 is Harmful

Kirk Kinder is a Certified Financial Planner and publishes the blog, Swim Upstream to Wealth. He recently wrote an article on his website about the Credit CARD Act of 2009: Government Credit Card Reform Will Hurt Responsible Customers. Yesterday he wrote the following comment on my article outlining the Act (emphasis mine):

I am a huge fan of transparency, but I don’t like the government getting involved in this for a few reasons:

Shunning responsibility. It is just another example of us shunning personal responsibility and letting the government “save” us. If you don’t like 60 page credit card agreements with fine print, then don’t use them. If customers walked, then the industry would change.

Unintended consequences. This will cause the companies to find new fees in other ways. More than likely, it will hit those folks who pay the balance each month. Annual fees, disappearing rewards programs, or shorter (or no) grace periods will become standard. Also, the folks who are irresponsible with their usage of the credit cards will find lower credit limits and higher interest rates from the get-go. It will pull credit out of the system. Just wait – two years from now the government will be back at the credit card companies charging them with not making credit as readily available as it once was.

Subsidizing deadbeats. As mentioned above, the responsible card owners will end up subsidizing those who are fiscally challenged. This is not right…period.

I hear how this will protect college students. You really have to wonder if college does much for students. Maybe degrees are over-rated. They are spending upwards of $40,000 for a college education (at a state school), but they can’t figure out that eventually they have to pay for that pizza they just bought with a credit card. Ignorance isn’t an excuse. This isn’t a hard concept to grasp, especially for someone at an institute of higher learning. I hate to be rude, but maybe you shouldn’t spend $40,000 on a college degree for someone who can’t figure out that the pizza and beers aren’t free when you put them on plastic. Besides, if you are treated as an adult in the eyes of the law, then you shouldn’t have to get Mommy or Daddy to co-sign for you. College is there to teach life lessons. Either they learn quickly to use credit wisely, or they come out of college and learn the lesson the hard way. Plus, do we think that a college student will graduate and suddenly use credit wisely. Do they shed their ignorance at 22. I find most people really get into trouble with credit once they have good paying jobs where they can get a great deal of credit.

The government is just pandering for votes. They figure if they can say they got tough with the banks regarding credit cards, we will forget they gave the banks billions. Or, that they authorized the bonsues at AIG.

Hate to be so cynical, but this is really a ridiculous waste of time and money. If they really want to make a difference, then teach personal finance in the schools.

Why I support the Credit CARD Act of 2009

Kirk, Your arguments are well thought out and bring up serious issues, many of which I agree with:

(1.) As I mentioned in yesterday’s article, personal responsibility is the key and we should never forget that.

(3.) I also don’t believe we should subsidize deadbeats, and I have a hard time with that point. But the difference is that the government isn’t bailing out credit card customers or credit card companies (yet). Also, credit cards rewards programs have already been declining over the last couple years, well before this bill was in place.

(4.) I also don’t agree with the government placing age restrictions on credit cards. I think that if you can enter a legal contract, join the military, or vote (all age 18), then you should be able to get a credit card. Using a credit card responsibly can be a good method of building high credit score, which is important in our society.

Why the Credit CARD Act of 2009 is needed: The biggest issues I have with the credit card industry are the lack of transparency in the credit card industry and that credit card companies are not currently held to any standards other than the standards they set within the industry. Here are the topics I think are the most important in this Act:

Universal default. I understand the credit card companies’ excuse for this practice, but this practice unjustly hurts many customers. It can send borrowers into an endless spiral of added interest and fees – which is exactly what the credit card companies want. They don’t want people paying on time, they want people perpetually paying interest and fees and as little principal as possible.

Standardizing due dates, billing notices, and requiring free online/phone payments. Some companies will charge late fees if the payment is received after 10am on the due date, regardless of when their mail arrives (mail arrives in the afternoon in most places). Is that fair? What about sending the bill to the customer less than two weeks before it is due, knowing full well that it might take a full week to get to the customer. I received a bill today (Wednesday) that is due next Tuesday. With Monday being a holiday, I can’t mail it for fear it will be late. I paid online, but some companies still charge for online payments or telephone payments. It’s actually cheaper and more efficient for them to handle online and telephone payments, but some credit card companies charge because they can.

Over the limit fees. Yes, customers should keep track of how much they have spent, but credit card companies are all too quick to allow them to charge more than their limits because they can charge $39 over-the-limit fees each time they do it. Once upon a time a credit card was refused when the limit was reached. Then the lenders discovered how easy it was for people to forget and for them to charge hundreds of extra dollars in fees. Consumers should have the right to turn that feature off.

The Credit CARD Act of 2009 is not perfect. I don’t agree with some aspects of act, and all of Kirk’s points are valid. But the credit card industry thrives on confusion, changing rates and agreements without warning, and charging usurious fees. None of the aspects of this bill will break the credit card companies, but they might just give some customers the break they need to end the cycle of debt they are in. The final responsibility lies with the credit card holder, but the Credit CARD Act of 2009 gives them a more level playing field.

Ryan Guina is the founder and editor of Cash Money Life. He is a writer, small business owner, and entrepreneur. He served over 6 years on active duty in the USAF and is currently a member of the IL Air National Guard. He also writes about military money topics and military and veterans benefits at The Military Wallet.

I, too, agree with some of Kirk’s points. I also agree, Ryan, with your overall assessment. I think you said a mouthful with, “But the credit card industry thrives on confusion, changing rates and agreements without warning, and charging usurious fees.”

There are plenty of loopholes currently that negatively affect good consumers. There are loopholes that punish everyone like “if we don’t receive your payment by noon on the due date, you’re late even if we get it at 2 p.m.” or “your payment was due on Sunday, but we didn’t open Saturday’s mail until Monday, so you’re late.” Then a $39 fee follows.

I can’t agree more that high school students need more financial education, and college students need more financial education, too. I’m not sure I agree with Kirk’s philosophy of letting them learn the hard way because those mistakes can ripple down and effect everyone. We’re seeing it now.

Overall, I think that the act is going to be fairly beneficial. It is mostly aimed at credit card practices that penalize even the responsible users of credit. While personal responsibility is important, the credit card companies should also have the responsibility to play fair. I do disagree with the under 21 part, though. If you are legally able to enter into a contract, you should be able to…legally enter into a contract.

My real concern is the timetable for implementation. I am worried that between now and February credit card companies will rush to do what they can to use the current rules to their full extent, slashing rewards and jacking up interest rates.

Miranda, I’m sure there will be some negative aspects of the bill that occur before implementation. For example, I wouldn’t be surprised to see a string of interest rate hikes before the change. It will hurt some customers, but overall, I think the environment will be improved.

While I can understand the frustration of the age limit, I also understand why they are doing it. Too many college students in the past have used credit cards very irresponsibly. They even pay tuition with them! I think the hope with this act is that college students WILL get credit cards with their parents as cosigners. Then, if the parents notice their child doing something foolish, they can step in and teach their child how to use the card responsibly. Of course, this only works if the parents are educated about credit cards themselves and care about their child’s financial well-being. If the parent does not care or is uneducated about credit cards, then having the parent as a cosigner won’t affect the student one way or the other. So, I can see where they are coming from.

Olivia, I am not sure if I would ever cosign a credit card for my child. It doesn’t teach the child responsibility or how to handle money, and the risk is high because you cannot control it. A better option would be to give the child a repaid credit card or a debit card. That can’t ruin the parent’s credit.

I understand why the government thinks this is a good idea, but I don’t agree with it. If someone is old enough to enter into a legally binding contract, they should be able to get a credit card.

In regards to narrowly missing your credit card bill due date: If you’re a pay-it-in-full-every-month user, just call up the CC company and politely say that you mailed the check in time and ask them to remove the late fee. Chances are, they’ll erase it based on your good history and then express their appreciation to you for being such a loyal customer. It worked for me a few times….

Dan: That might work for someone who pays on time every month, but it won’t work for everyone. I think its ridiculous that they can get away with sending out bills so close to the deadline… they get a ton of late fees that way.

Great post Ryan. I do agree that the credit card industry is not consumer friendly, and you do a great job of pointing out how they aren’t. And, my post was done late in the evening so it was more of a vent than an educational post. I appreciate you pulling out the nuggets for a discussion.

I still fear that this will have unintended consequences for all involved. I believe this is true of any government interjection into the markets, and it will be especially true here.

The transparency and orderly rules will be fantastic, but the end result – costs to the consumer – will not be reduced because of it. Those who are irresponsible with credit will end up with higher rates from the start, which will cost them as much, if not more, than the fees or increasing rates. Second, these folks will get even smaller credit limits. I read a good piece how this may result in more low income folks utilizing check cashing services. Talk about high fees.

For prudent credit card users, they will pay through annual fees, shorter grace periods, or other charges. And, as mentioned, it will subsidize those who don’t use credit wisely.

More than the fees, I fear this just reinforces our lack of personal responsibility. People will think the government is helping them out, which ultimately it probably won’t as the total costs will remain the same or credit will be harder to attain, but they will think they were helped. Then, as other issues pop up, we will look to the government to fix instead of taking control ourselves.

A part of me also wonders if this will help those drowning in debt. Is it the confusing agreements, lack of standardization, or penalties and fees that are hurting consumers, or is it there behavior? I know the fees hurt. I think just about everyone has had a late payment fee at one point in their life. But, I seriously doubt that this is what is keeping folks tied down. It certainly doesn’t help, but I think their poor financial management is to blame.

And, as hard as it is for me to say this, we need to remember that the credit card companies are loaning us money with no recourse. If we default, they get nothing. With defaults steadily climbing, these companies face some serious losses. If someone gives us money with no way to force a payment, we should have to face stiff punishments for failing to pay promptly.

Again, Ryan does a great job of explaining the pros to the act, and I am all for transparency and consistency, but this will be another act that will bite us in the end. I don’t know exactly how yet, but I can see the potential very easily.

Kirk: I am a fairly strong believer in the government staying out of the markets. Watching the housing market bubble and bank bailouts has been difficult for me. There are many people getting insanely wealthy and companies being rewarded for unethical and sometimes illegal behavior.

Will this end people abusing credit cards? Of course not. People will always abuse them. But standardizing rules takes away a big excuse and makes things clearer for everyone involved – including the credit card companies.

Will this decrease credit limits? Probably. but is that really a bad thing? I understand the need to spend money to maintain economic growth, but the reason the real estate bubble happened was too much easy credit. And many people who are not financially savvy treat their credit cards as easy credit. People with a $30,000/year income do not need a $30,000 line of credit on their credit cards.

No recourse for bad loans? Then credit card companies shouldn’t be so quick to approve everyone that applies for a credit card and extend their line of credit after the borrower makes 2 or 3 payments on time. If the credit card companies were really interested in having the loans paid back on time and in full, they would be more strict about approving cards. For credit card companies it is strictly a numbers game. They know their demographics and how many cards they need to approve and at what rates and credit limits to achieve profitability. The ideal credit card customer does not pay their bill on time, but maintains a perpetual balance.

I will reiterate my earlier sentiments: Ultimate responsibility lies on the card holder, and I don’t think credit cards or credit card companies are evil. But I do think there needs to have more standards within the industry.

I see both sides of the coin, and while I’m a big advocate of personal responsibility, I believe some aspects of this Act are needed. The confusing terms, ambiguous terminology, fees causing more fees, double cycle billing…all these things culminate into a festering wound that has become our credit crisis. Yes, there are those people who abused their credit and are in the position they’re in because of their actions. But, there are also perfectly good account holders who got screwed by credit card companies malevolent practices. So, while I understand this is going to cause credit card companies to respond in less than favorable ways, I think having clearly defined regulations for an industry that has long since taken advantage of consumers is long overdue.

I came across this blog skimming google results to figure out how credit card companies will turn a profit in lieu of the Credit Card Act of 2009. The sudden interest came about after being hit with an overlimit fee. I’ve been a responsible card holder over 3 years. I never actually wanted a credit card until realizing the difficulty of renting an apartment, receiving low premiums on insurance, etc. in California. Frankly it’s quite upsetting because I earn a considerable amount of income and have never been in debt.

Last week I had a lapse in financial responsibility and went over the credit limit. I only noticed days later when card transactions were successively declined. Then bam, hit with a $40 charge. Now I’ve never had official training using credit cards and knowing the ins and outs. All the good practices I learnt from my father, so this overlimit fee was news to me. I thought a credit limit was just that, a limit that you couldn’t go over. I managed to get the fee reversed after days on the phone with the card company. What upset me was their stubbornness to remove the fee, but their outrageous lies. Every agent and their manager said I couldn’t opt for hard limits. It took second hand advice from a close friend and a threat to cancel my card to actually change my account to reflect hard limits.

This experience has lead me to believe that the Government doesn’t want to condone irresponsible behaviour but protect consumers from the vile practices of credit card companies. It’s not the over-limit charge that I want protection from, but from the card companies not advertising the fact that you can opt-out. In my opinion, it’s the card companies that are being irresponsible.

Despite risking sounding repetitive, I agree 100% with Ryan and Kristen: financial basics should be taught in the classroom. This will greatly cut down on debt trouble later on in life.

On another note, I do support the passing of the Credit CARD Act especially in the context of standardizing payments and notifications. The credit card industry has gotten to the point where it needs to be seriously rebuilt from the ground up. In the meantime — luckily for us! — there is a growing number of sites out (off the top of my head, BillShrink.com is a great example) there that aim to guide people through the intricacies of credit card plans; IMO, it’s better to have computers wade through the tedious fine print and zillions of options rather than me. The combination of these free online resources and an overall increase in personal financial responsibility might just be the tipping point for improving the economic sense of America.

I know over limit fees are not something any one wants. but now you have the option of opting out and not getting the fee due to the transaction will be denied. but what is going to be denied if you are close to your credit limit. Are you not going to be able to put gas in your car at a prepaid pump so you can get all the way to work due to the credit card company’s new responsibility to deny you from going over the limit. most gas pumps work on the simple principle of if you have something available you can fill you tank. well I f you have $20 available and you fill your truck with $60 how is the card company to deny you for something you already did? I don’t think card company’s should allow you to charge over the limit but you should be responsible in some fashion if you do something the card company is not able to prevent you from going over the limit. I myself have found myself in a bad mood and went on a shopping spree to cheer up. spending lots of money in a very short time in one day. oops, spent more then I had available due to a fast food place didn’t charge my balance till midnight. am I correct in understanding that this is the consumers fault not the credit card company’s. any over limit fee is a penalty for not controlling your finance. banks can charge you for every returned check; the merchant can charge you. one returned check can easily coast you $50 if both charge you. why can you not be held responsible for budgeting you credit card balance?

@pat – So opt-in. Credit cards are designed with limits in mind. If the industry doesn’t conform to the general principal that limits are involved, then it needs reform. If the gas pump doesn’t check to see if you have available credit, then it shouldn’t authorize charge and allow you to pump gas. If merchants are using old equipment that doesn’t authorize transactions immediately by phone or over the Internet, they need to upgrade to modern POS technology. This is not only to protect the consumer and merchant, but also prevent fraudulent activities.

Now, if you want to be allowed to go over the limit, simply opt-in. Card companies deem transactions over the limit as a convenience. If cardholders want the convenience, they’ll opt-in. If they don’t, then they’ll suffer. However those that haven’t heard of such a scheme, expect credit cards to have a hard limit, and their expectations should be met from the onset of receiving their credit card. Still, that’s no excuse for merchants not to upgrade to modern technology to do real-time authorization and transactions. This is important to the security of the industry otherwise the merchant is at risk of protecting stored credit card information on their end, which can lead to identity theft of the cardholder or fraudulent activity against the merchant. However it’s their risk & responsibility, not the credit card company, and certainly not the consumer.

I might misunderstand your frustration, but I don’t drive so I rarely interface with gas pumps. I just think gas stations should rethink their design if it’s flawed or based around assumption that cardholders have the convenience of going over the limit.

But think of it this way: as a consumer shopping in a department store, you find an expensive suit (think $100s) representing a huge discount of 95%. You buy it. Are you responsible for mistake by the department store after the transaction?

The over-limit fee isn’t going to protect merchants from dishonest or consumers that bring risk, nor do they expect consumers to be autonomous. That’s why merchant’s buy insurance :).

Hi, Ryan. Good to see you’re still posting great content. Just came across this post. . .any shift in your point of view since then? Do the benefits to the majority of consumers outweigh the potential negatives?

Demitra, I love the standardization and transparency it brings to the industry, but I can’t help but think that costs will be passed on to the consumer in the form of higher overall interest rates. But I think things will settle down and stabilize when these new standards have been around for awhile. The competition will force the credit card companies to get creative once again.

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